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Introduction to risk management
1. A bank believes it has industry best practice risk management and therefore decides to increase its risk-taking to beat its competitors. Which of the following theories BEST describes the bank's risk behaviour?
A. Risk compensation theory
B. Habituated action theory
C. Social action theory
D. Protection motivation theory
2. An organisation finds an unexpected relationship between the height of customers and the frequency of shoplifting. lt consequently implements bag searches for tall customers.
Which of the following statements BEST describes a potential bias?
A. The organisation may be in error due to the above average effect
B. The organisation exhibits calibration bias because it believes the data is accurate.
C. The organisation is likely to be correct most of the time because the data proves a predictive relationship
D. The organisation may be in error because of magical thinking
3. In general, individuals are more averse to experiencing a loss than experiencing a decrease in profit of the same size
True
False
4. A commodity trader notices that the daily oil price has fallen four days in a row and decides to buy on the fifth day because the probability of an increase in price is now more likely.
Which of the following statements BEST describes the trader's possible bias?
A. The trader is incorrect and suffers from the above average effect bias
B. The trader is correct and prices are more likely to rise after a sequence of falls because the price is certain to catch up with a further sequence of daily increases
C. The trader is using a rule of thumb that may be incorrect
D. The trader is exhibiting gambler's fallacy and the price is not guaranteed to increase after a series of decreases
5. Risks can be identified using SWOT analysis. Which of the following statements is TRUE?
A. All of the others
B. Opportunities have an external origin
C. Weaknesses and threats represent risks
D. Strengths and opportunities represent risks
6. Insurance companies are unwilling to insure the financial successes of many small businesses because:
A. The risk is speculative and involves moral hazard.
B. The risk is particular to the individual.
C. The risk is pure and particular.
D. All of the others.
7. Which of the following statements is FALSE?
A. An organisation's risk taxonomy may be structured primarily by organisational units, then by risk types, and then by risk subtypes.
B. An organisation's risk taxonomy must always be structured primarily by risk types common across all organisational units, then by risk subtypes.
C. A risk taxonomy is a comprehensive structured hierarchical set of risk categories and subcategories into which known risks are organised
D. How a risk is categorised will determine the risk owner.
8. Risk management is the systematic and coordinated activities to identify, assess and treatrisks faced by an organisation in order to avoid all unexpected deviations from its goals.
True
False
9. Which of the following is NOT an element of the risk criteria:
A. A matrix describing how likelihood and consequences are combined to form. a risk scale.
B. A scale describing how consequence is defined.
C. A scale describing how likelihood is defined
D. A statement stating which risks are prohibited
10. A company can invest in a new project and earn S1 million. It might also earn nothing.
The probability of the project's success is 10%. The company invests $100,000 in the project. Which of the following statements is TRUE?
A. The absolute risk premium is S10,000.
B. The relative risk premium is 10%
C. The company is risk-neutral.
D. The certainty equivalent amount of the project is S1 million.